Class of 2016, Here’s How to Set Up Your First 401(k) – NerdWallet

401… what?

No shame if that’s the first thought that comes to mind when presented with this benefit at your first job post-graduation. Its named after a section of the tax code, and the IRS could’ve saved us all a lot of grief by calling it what it is: an employer-sponsored retirement savings account.

The beauty of a 401(k) and why you should listen up when you get to this part of your job orientation is that it allows you to send money directly from your paycheck into that investment account, before taxes are taken out. Better still, at least a portion of those contributions are likely to be matched by your company. (Another name for that: free money.)

If you’re offered one of these accounts, you should take it. Getting the retirement-saving ball rolling not only puts time on your side the earlier you start, the more time your money has to grow it also begins the process of turning saving into a habit. On the flip side, the longer you put it off the longer you’ll put it off.

There are a few things you need to know about this kind of account. Your contributions are earmarked for retirement, and because they’re made pre-tax, the IRS holds them with a tight grip. In most cases, you’ll owe a 10% penalty and income taxes if you pull the money out before age 59. But if you make it to that finish line, you’ll have a pot of money that has grown tax-deferred; when you make withdrawals, called distributions, that money will then be taxed as income.

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